1. UK Health Care Industry Landscape

The Healthcare sector encapsulates a diverse range of companies from several sectors such as Pharmaceuticals & Related Segments, Hospitals, Clinics; Healthcare IT; Laboratories and Testing Services; Healthcare Services and Facilities; Managed care; Medical Devices; Hospital Supplies Manufacturers and Healthcare IT. The companies operating in this industry provides medical services, manufacture drugs, medical equipment and facilitate the provision of healthcare to patients.

The industry attracts a lot of Government intervention. Moreover, the UK healthcare system is well managed as the entire population in the UK got covered by the National Health System (NHS). NHS is financed by general taxation and run by the Department of Health.

The growing and ageing population caused a surge in demand for hospitals over the past five years. However, NHS budgets are not sufficient to cope up with the rising demand as it has long waiting times and is overcrowded. The private sector got benefitted from this and got expanded over the period. The government made £63 billion available in 2020-21 to support the NHS' response to the coronavirus pandemic and confirmed additional funding for the current year, including £8 billion to help the NHS provide elective care that was delayed by the pandemic.

Key Trends in the Health Care Sector

Risk Exposures to the Health Care Sector

• Federal Reserve Meeting Minutes: The recent Federal Reserve meeting minutes indicated an earlier and faster rate hike. Thus, it could adversely impact health care investments.
• Omicron Variant: The Government-led restrictions under Plan B because of an increasing number of Covid-19 cases in the UK may adversely impact the sector.
• Commercialization Risk: Failure to execute commercial strategies regarding affordability, pricing and availability of products at the right time can impose significant risk. The Covid-19 pandemic has created supply chain disruption, delaying the pipeline, drug approval and timely clinical testing.
• Lack of Skilled Professionals: A widening demand-supply gap of skilled professionals had emerged several headwinds for the public and private health systems, which may also have long-term, detrimental consequences in 2022 and beyond.

SWOT Analysis

Benchmark Index Performance

Based on the one-year performance, the FTSE All-Share Pharmaceuticals & Biotechnology index has outperformed the FTSE 100 and the FTSE 250 index. The FTSE All-Share Pharmaceuticals & Biotechnology index generated a return of about 22.79%; however, the FTSE 100 produced a return of around 10.19%, and FTSE 250 generated a return of around 10.84%

Figure 1: One Year Benchmark Index Performance

Health Care Sector Outlook

The Covid-19 pandemic has transformed the UK’s healthcare industry to a larger extent. Moreover, COVID-19 has brought several emerging health care trends, particularly around health equity and environmental & sustainability. Furthermore, a transition in consumer behaviour, the integration of life sciences & the health care sector, advancement of digital health technologies, and clinical innovation continue to be top trends in the health care sector worldwide. Meanwhile, the U.K. Health Security Agency pointed out that the risk of hospitalization for people infected with omicron variant is almost one-third of that caused by the delta variant. The developments in the clinical trials for the Covid-19 vaccine boosted the sector in 2021. Looking ahead, the growth of the healthcare industry shall be supported by investments in digital innovation and data analytics.

2. Investment analysis and stocks under discussion (SN., CTEC, AGL)

After gaining insights into the Health Care sector, we would look at the business model of three Health Care players listed on the London Stock Exchange.

A. Smith & Nephew PLC (LON: SN.)

(Recommendation: Buy, Potential Upside: 10.24%, Market Capitalization: GBP 11.62 billion)

Smith & Nephew PLC (LON: SN.) is an FTSE 100 index listed medical technology company with global operations.

The Company had paid an interim dividend of 14.40 US cents per share on 27 October 2021, while the ex-dividend date was 30 September 2021.

The Company will release full-year FY21 results on 22 February 2022.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)                       

From a technical standpoint, the MACD line remained above the signal line, indicating an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 10.24% over the closing price of GBX 1,338.50 (as of 11 January 2022).

B. ConvaTec Group PLC (LON: CTEC)

(Recommendation: BUY, Potential Upside: 15.73%, Market Capitalization: GBP 3.79 billion)

ConvaTec Group PLC (LON: CTEC) is an FTSE 250 index listed technology and medical products Company specializing in wound treatment, continence and critical care, infusion devices, and ostomy care.

CTEC had paid an interim dividend of 1.717 US cents per share attributable for H1 FY21 on 14 October 2021 with an ex-dividend date of 02 September 2021, driven by robust bottom-line profitability achieved during the period.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the stock price is trading between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price. Moreover, the MACD line remained above the signal line, indicating a bullish price momentum.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 15.73% over the closing price of GBX 187.85 (as on 11 January 2022).

C. ANGLE PLC (LON: AGL)

(Recommendation: Speculative Buy, Potential Upside: 13.72%, Market Capitalization: GBP 288.05 million)

ANGLE PLC (LON: AGL) is an FTSE AIM All-Share listed specialist medical diagnostic company, which offers products for cancer diagnostics and fetal health.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the stock price is trading between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has a upside potential of 13.72% over the closing price of GBX 122.00 (as on 11 January 2022). 

*All forecasted data and peer information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*The "Buy/Speculative Buy” recommendation is also valid for the current price as covered in the report as on 12 January 2022.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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